Taxing the digital economy under discussion in the EU
The EU wants to levy more tax on profits generated through the digital economy in the EU. The Ecofin Council has agreed to aim at reaching a “common understanding” by December 2017.
The EU Commission released a communication on a fair and efficient taxation of digital economy businesses ahead of the EU Tallinn Digital Summit on 29 September 2017 (see our note of 22 September). These EU tax developments may have an important impact on the future tax position of Swiss cross-border businesses.
Taxing the digital economy: state of play in the EU
EU finance ministers will try to reach a common ground by year-end, based on the options outlined in the EU Commission’s communication. The Commission suggests amending the international (OECD) rules governing taxable presence and profit allocation, e.g., to include the concept of ‘virtual’ or ‘digital’ permanent establishment. Such amended principles should then be embedded in the EU Common Consolidated Corporate Tax Base (CCCTB) proposal that was relaunched earlier this year.
In parallel, short-term solutions will also be explored: an equalisation tax on the turnover of ‘digitalised companies’ (supported by France, Germany and 8 other Member States, but opposed by several others), a withholding tax on digital transactions, and a levy on the revenue from certain digital services. These solutions should capture the digital activities in an alternative way to the current international corporate tax framework.
It is accepted that all potential short-term solutions may cause implementation issues and that further work is needed to find a workable scenario.
Taxing the digital economy: international tax considerations
These initiatives to tax the digital economy would represent a serious paradigm shift in international tax principles. The various initiatives all aim to establish a taxable presence in the customers' or users’ residence country. Such a tax system would likely trigger fierce debate with non-EU jurisdictions, notably the US, as the tax position of the large US tech companies may be significantly impacted. But also Swiss based MNEs with an EU client / consumer base will be affected.
Recent OECD and EU reports show that increasing the tax take from digital platforms is difficult under the current international tax system. The BEPS deliverables are believed to not adequately address taxation of a digital business in the consumer (source) countries. In addition, current OECD transfer pricing rules do not adequately account for value that is created by gathering data of (free) users of search engines, social media platforms and other online business models.
Working on a fundamental revision of the international tax allocation rules to address this issue – e.g., by introducing a 'digital or virtual permanent establishment' – is apparently considered time consuming and difficult, hence the temptation to adopt a short-term solution ('quick fix') such as an equalisation tax. The communication lists the following alternative short-term avenues:
- The above-mentioned equalisation tax on the turnover of digital companies;
- A withholding tax on digital transactions; and/or
- A levy on revenues from digital services and advertising activities.
The Commission concedes that all potential short-term solutions have issues and that further work is needed to find a workable scenario.
Given the growing digitalisation of many businesses, the introduction of a tax on digital activities would, of course, have a very serious impact on the tax position of many Swiss enterprises operating internationally.
Other issues and hurdles that will need to be tackled include, inter alia:
- The diversity and evolution of business models in the ‘digital economy’ (online retail, digital advertising, digital products, collection and exploitation of data, etc.);
- The need to take into account the impact of new rules on traditional businesses, though the reluctance to have rules specifically targeting the digital economy may be diminishing;
- The need to achieve unanimity of all EU Member States, despite diverging interests, and to avoid putting EU companies at a competitive disadvantage with foreign digital businesses by going too quickly and too far beyond BEPS implementation;
- Compatibility of the solutions with EU freedoms, State aid rules, current tax and other bi- and multilateral international agreements, and
- The risk that some Member States may adopt unilateral measures creating double or multiple taxation. An example is the UK diverted profit tax that was introduced in 2015.
The Ecofin members intend to seek consensus on one or more of the options to be outlined by the EU Commission. The Commission, like several Member States, prefers a global solution driven at OECD level, but may publish a legislative proposal during spring 2018, when an OECD report is also due, if no international consensus can be swiftly achieved.
Recently, the EU Commission President Juncker expressed strong support for moving from unanimity to qualified majority voting on important tax matters (like corporate tax harmonisation). Whether there is political consensus for this idea is questionable, but it illustrates the EU Commission's ambition to drive the (corporate) tax agenda. If no consensus is reached, a leading group of Member States could launch a so-called “enhanced cooperation” procedure to progress faster.
It is still too early to speculate whether there is sufficient political momentum for the introduction of an EU tax on digital companies, but the topic has clearly become a priority. We are closely monitoring the potential impact of these initiatives for your business and will keep you informed. We will publish our initial analysis of the proposed short-term solutions over the coming weeks.
FabianSutterAttorney at law, Swiss certified tax expert Associate
Fabian Sutter, attorney at law and Swiss certified tax expert, is an associate in our Zurich office. He focusses on Swiss and international taxation, in particular transfer pricing group and investment structures, M&A, financing and capital market transactions, private equity, venture capital and structured financial instruments.T: +41 43 434 67 14 M: +41 79 398 76 39 E: firstname.lastname@example.org